U.S. may curtail Fannie, Freddie

Fannie Mae and Freddie Mac, the mortgage-finance companies under U.S. control, must cut their portfolios to $250 billion each under proposed rules that would make permanent an emergency agreement last year.

The largest U.S. sources of home-loan money also would have to reduce their holdings by 10% a year starting at the end of 2010, the Federal Housing Finance Agency said on its website Tuesday.

The draft rule would lock in the terms of a $200-billion emergency financing agreement struck with the U.S. Treasury Department when the two companies were seized by regulators in September. The Treasury Department had reserved the right to amend that agreement and lift the portfolio restrictions if the companies regained their financial footing.

“It was clear at the time they entered the agreement there was no easy way, if any, to get away from these portfolio restrictions,” said Jim Vogel, head of agency debt research at FTN Financial.

The draft will be open for public comment for 120 days.

Lawmakers could choose to overturn the portfolio-reduction rules in restructuring operations of the two enterprises and decide the “appropriate mission and roles for Fannie and Freddie,” Vogel said.

Federal Housing Finance Agency Director James Lockhart said that “everyone fought long and hard” to give the agency more power over Fannie and Freddie’s $1.7-trillion combined investment portfolios.

Still, Rajiv Setia, a fixed-income strategist at Barclays Capital, said the comment period, which is longer than usual, suggests the regulatory agency may be open to maintaining the portfolios at their current size.